Claiming GST paid as expense and reversing the same from e credit ledger

[Kanishk Manglik]

Respected faculty,

Company have a supply of goods which falls under inverted duty structure. The GST paid on purchase has been taken as an expense in profit & loss a/c. It now have to reverse the GST from the credit ledger of the amount that has been taken as expense. Will the company now have to pay interest on the said reversal @ 24%. The interest provision applies when one takes input that is ineligible and then reverse it. In the company's case the GST was eligible but it is reversing it by choice as it had claimed it as expense. Will it still be liable for interest.

Thank You

[Shilpi Jain]

In cases where credit is reversed even before it is utilized there will be no interest liability as there was n instance of short payment of taxes.

Also, merely because you are reversing credit in your books does not require you to reverse credit in your electronic credit ledger. Credit once validly availed is yours as there is no time limit in law for its utilisation

[KASTURI SETHI]

Sh.Kanishk Manglik Ji,

I agree with Madam Shilpi Jain.

In addition to her views, I am of the view that Section 50 is to be read with Section 42 and Section 43 as per sub-section 3 of Section 50. Interest is required to be paid only if output tax liability is reduced. In other words, you have not reduced output tax liability inasmuch as ITC availed has not been utilised. If you have not utilised ITC, no interest is required to be paid.You have not caused any loss to the revenue. Hence no interest is required to be paid in this scenario.

The Supreme Court in the case of Pratibha Processor has also held that interest is essentially compensatory in nature. This judgement is relevant even in GST regime.

AI Summary

Interest on reversed input tax credit arises only if reversal reduces output tax liability or causes revenue shortfall.
If input tax credit is reversed before any utilisation and there is no short payment of output tax, interest does not arise because output tax liability has not been reduced and no loss to the revenue has occurred; validly availed credit need not be reversed from the electronic credit ledger merely due to accounting as an expense.